brewer12345 said:
Maybe it is as low as the Fed thinks they can get the suckers to take?
I wouldn't be too surprised if the answer is fairly close to that...in all competitive markets, you only pay as much as you have to (or, conversely, charge as high a price as your customer is willing to bear).
I have never seen the figures, but I'd be interested in seeing what the annual purchases are by Americans for savings bonds - anyone have any data?
I'd imagine that there are plenty of financial simpletons who either have relatives or themselves were recipients of EE bonds from the 80s and enjoyed 7% average annual returns, and saw a $5,000 investment grow to $15,000, and figure that savings bonds are an awesome thing (and subsequently automatically buy them).
So, if the government advertises a sky-high rate (due to inflation) for I-bonds, it only makes sense for them to offer as low of a fixed rate as they have to in order to maximize their intake while minimizing their interest payments. Sure, it sucks for the person buying the bonds, but the Treasury Department isn't in the business of printing money to give us just to be nice.
Now, the REAL interesting part will be in May 2006, when they reset the fixed rate. Short-term rates will likely still be in the 4% +/- range. Given how high oil ran in the previous 6 months to cause the CPI to jump to a 6% annual rate, if the current slide in oil remains steady, the CPI index from now to May 2006 will (IMO) be pretty damn low. So, if short-term rates in May 2006 are about 4%, and CPI is only, say, 1.5%, that would force the treasury to jack up the fixed rate to make the overall interest rate on I-bonds (somewhat) comparable to short-term rates, and would require a huge increase in the fixed portion...unless they want to try offering a miniscule 1.x% fixed with a low CPI rate.